Detroit's recent file for bankruptcy: a possible look into the future of what could happen to other cities here in the U.S.

Detroit just recently filed for bankruptcy, if you did not already know. The city was once a economically thriving city. The city's booming auto industry kept that city afloat since its birth. However, the auto industry here in the U.S. has saw drastically declined; we recently saw that with through GM. Labor costs here in the U.S. have pushed companies to international grounds.

Could we possible see other U.S. city's crumble because of off shore labor?
Also, what can we learn from Detroit's file for bankruptcy?

Aug 4 2013:
To say it's natures way, is cute, but ridiculous. Detroit is failing for the same reasons cities, around the country, and world are failing.That is (ORGANIZED CRIME). I'm not talking about a bunch of thugs at pizza joint, shaking down local businesses for protection money, although Detroit had plenty of that. I'm talking about big time organized crime.Thugs come in all sizes.The Godfather is an old fashioned picture of things as they were in the twentieth century.That's a fantasy nowadays, very quaint. The Unions didn't desiign those gas hog cars, and trucks that burn enough fuel to power an aircraft carrier. It was the (Corporartions) that made all the design, and marketing decisions. They completely ignored obvious international trends since the oil embargo of the 1970s. Because of high profit in the domestic market for these gas hogs, they ignored trends, and were slaughtered as result in international sales. Furthermore there's a mountain of evidence that the (oil industry) played a major roll in convincing the auto makers to force those gas hog brands down our throats.They proceeded to pump up the American brainwashed males that their manhood would be in question if they didn't drive a Ford F250, or Dodge ram big eneough to tow a freight train to the local bar for beers after work. Detroit is failing because a corrupt congress not only allowed outsourcing to foreign factories, but actually encouraged it because, they were handsomely paid off to do so. The major investors, The big boys, the top executives, and the insider traders on Wall Street cashed in before taking "deliberate" steps to commit fraud, and destroy unions which has always been their goal. They leave the American taxpayer with the mess. The auto industry is doing fine now because of the American tax payer. They should be forced to repair the criminal damage they deliberately caused in persuit of unmittigated, despicable, corporate greed, and the corruption they caused in local governments.

Aug 6 2013:
That covers much of it but don't forget the owners of us auto industry bought into japan-korea-china big.
They created overseas jobs, product, etc to undermine usa workers, meanwhile gaining powerful influence over foreign governments, etc

Jul 24 2013:
Sorry Austin but the facts don't bear that out. Very few jobs in the aggregate lost to "off shoring". Right to Work States like Tennessee, South Carolina, and Texas have been huge job creators while Big Government/ Big Labor States like Michigan and Illinois have gotten crushed. And what of 60 years of single party rule for Detroit?

Jul 24 2013:
The prospect of bankruptcy by other cities is very real. The reasons for that are not only due to the different wage scales between the U. S. and overseas countries. They also include that there are more consumers of many manufactured commodities such as autos, electronic devices, and other products, which have big consumer markets such as in China and India. Thus the moving of manufacturing facilities to China, etc. is due to the fact that it's more practical that the car cos. could make cars and sell them there conveniently. As to the method of charging import duties, the free trade rule will discourage a one-sided "protection" by government policy which wouldn't be allowed by the court on international trade agreement. Furthermore the Chinese could easily increase the duties of U. S. made exports into their country in retaliation..
The other problems in the Detroit bankruptcy are 1. the obligation in pension fund for city employees grow tremendously because of the reduced yield on the pension fund investment, thus added on more expense into the shortage from the city budget. The cause of the lower yield was due to the low economic growth from high unemployment and low interest rate policy by the Fed. 2. Consequently, the city tried to increase the taxes on businesses and individuals to make up the deficit which caused more of the taxpayers to flee the city. In the recent count, 78,000 buildings in the city are abandoned, and 40% of the taxes due are delinquent. So this is a vicious cycle that could only make it worse if they try to let it continue.
So, as long as the economic growth is stuck in little or none, then the situation most likely would continue. And this trouble will persist in the cities which tries to use taxes to make up the deficit spending. And the places to where the fleeing taxpayers go will benefit, including the nearby suburbs as well as cities in other regions with better economic growth.

Jul 26 2013:
1. 1950 population of Detroit was 1.85 million, within Detroit there were over 10 auto plants, making cars or parts and 1 headquarters. there were many plants in the neighboring towns
2. 1956 - Federal Highway act was passed and by 1960 it was cheaper to have plants away from Detroit
3. In the 1970's and 1980's saw the growth of plants in Ohio, Wisconsin, California, Canada (yes there were auto plants in Canada before NAFTA), etc. all based in North America
4. 1980 - population was 1.2 million - there was a major move to the suburbs by Whites and later Blacks starting in the late 1960's.
5. 1980 - number of auto plants was down to 6 in Detroit
6. In the 60's and 70's the auto makers made several bad bets - gas guzzlers and poor quality which still haunt to this day causing them to lose market share and causing layoffs and plant closings
7. 1980 Detroit Admin and Public labor unions bemoan the loss of the "good old days" and demand the auto industry move back to Detroit planning for its return - major problem to layoff public workers and they still assumed to support a population 1.8 million
8. 2010 - population 700K, 2 plants, 1 headquarters - total working 8k in Detroit
9. Today, 1 public worker per 55 people living in Detroit, estimated 6 Billion dollar pension/health care bill for retirees
10. 47% of the taxes for properties are not paid nor collected, budget assumes they are

Major Culprits: Detroit Admin, Labor Unions, Auto Leaders - all 3 short sighted and refused to see that "the king had no clothes"

Jul 26 2013:
Let's see, there is no explanation for Detroit to be in the situation that it is in.
A thriving auto industry where auto workers were making a good living, prudent city planning assured sustained growth and maintenance of city services. City employment policies were well thought out to insure that employment expenses could be adjusted to income projection to avoid unfunded liabilities. I just don't understand what went wrong.
I am sure the President will do something. He said he wouldn't let Detroit fail.

Sorry, sometimes it's just too hard to resist....

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Jul 25 2013:
You must have forgotten about the 50 billion dollars GM received in 2009. If that is not a sign that the U.S. lost its ground in the auto industry, I don't know what is. Furthermore, after receiving 50 billion dollars, I'd hope that GM could climb back up the auto industry ladder, and congrats GM found themselves at the very top in 2012. However, even though they have paid nearly all of their debt back to the treasury, the treasury will lose roughly around 11.4 billion dollars through this exchange: through selling their shares they received as payment towards the 50 billion.

I couldn't agree more with you when you say "we need a whole new technology for cars."

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Jul 26 2013:
NNNNNOOOOO not quite. Altho most of the "loan" was paid off, US taxpayers are holding a lot of stock that has to have a payout of $95 per share to get our ROI.... It may happen, but the new GM has not shown any really brilliant management yet and so it may not be in my lifetime...
no big deal but it may not happen in my 2 year old grandson's life time.
As far as making money on the deal, the Feds lost billions in tax revenues from bondholders of the old GM and lost tax revenues and paid out unemployment benefits to the thousand of non union workers at Delco Remy and other major GM suppliers. About the only real benefit to saving GM was the votes the president got from Michigan.

Jul 30 2013:
Does anyone know why the likes of Honda and Toyota as well as all other automakers not in Detroit were never offered any bailout help? Why they were not at the table testifying before Congress about how much they need help from the American government?

Jul 26 2013:
Yes, yes, yes! Ugh, it is so simple yet the process isn't being pushed. High speed rails would solve so many issues, and make life much more enjoyable for a large portion of the population. Why are we still wasting away in traffic, dying in wrecks, and pumping the air with all those delicious fumes? Oh, and as you said, it would provide a heaping pile of jobs just waiting to be filled. What are we waiting for?

Jul 24 2013:
Detroit bankruptcy is overwhelmingly the result of single party (Democratic) rule for 60 years, most notably black separatist Mayor Coleman Young who presided over Detroit's decline for 20 years. Democrats, aligned with Unions, chased away private business and spent the city into oblivion. It's truly a Liberal fantasy to blame Detroit's demise on "off shore labor". Any city in America run by unions may face the same demise.

Aug 1 2013:
Good point George. 28 states have projected bankruptcy when Obama care comes on board. The federal government is broke ... they are spending a lot more than is coming in. The fed is providing stimulus to companies that should have entered bankruptcy.

None of this is new news .. cities, states, and the federal government have been going South for a long time. I wish I could blame the current party in power .... but all of this existed prior to the voters putting these politicians back in office to continue the blood letting.

Aug 1 2013:
Agreed Ravi Batra last century in Pooring of America told us this started forty years ago. Samuelson's economics text tells us how the big empoyers lowered wages before the Great Depression. You may like some politicians more than I like ploiticians But the big donors are the same in both parties. When one lowers wages you lower wages. This bubble is going to get worse like they always seem to do. Ravi Batra is a conservative Republican economics prof at SMU.

Jul 24 2013:
i'd be interested in seeing a breakdown of the expenses of detroit over time.

more than 10 years ago now in australia, government went through a period of privatization where services were sold, to be then contracted out to private companies, on the argument that they'd be able to do it more efficiently and hence cheaper for residents. what happened was it worked; costs went down while quality of service remained ...for a time. what then started happening was roads that were built more cheaply started to need maintenance more often than roads that were previously built more expensively by the state, and infrastructure started breaking down as maintenance (deemed 'wasteful') wasn't carried out as often or as thoroughly as before so prices increased quarter on quarter for years (electricity prices are the worst, close to 10 times what they were a few years ago), and some councils found that there was only 1 company bidding on contracts they had offered so they had to pay whatever price that company wanted. very recently people have started talking about making services public again, since they've realised that what they previously thought was government waste actually wasn't at all.

Jul 25 2013:
it's not that they are leeches, it's that any company must do things like that or they can't operate. if they did preventative maintenance to save costs in the long run, the balance sheet for year would be down, shareholders would be complaining about money being wasted on maintenance that wasn't yet necessary, and either the company would fold or the directors would be replaced and you'd have exactly the same problem.

the whole idea of private companies providing civil services is incompatible, and that's without even going into the argument that every citizen in the country benefits if services are run at cost and are of higher quality than is absolutely necessary.

Jul 25 2013:
good questions! i guess we want good services provided at reasonable cost, which private corporations aren't suitable for providing. best leave them to the optional consumer goods that's what they do best.

what's your opinion on higher tariffs? i've been thinking about that myself lately, and if we put blanket tariffs back into the system, we'd encourage more local production and discourage outsourcing of jobs. it'd be bad for big multinationals but good for every other normal citizen just living and working.

Jul 25 2013:
yes it would, some australians are tired of getting treated like a 2nd-rate customer by the US (eg prices are double or even up to 4 times what they cost in the US, even for exactly the same product) so i'm no sure why we keep getting on board with the free trade thing. guess to most others 'free' sounds good.

Jul 26 2013:
That was what he was writing about. I regret that I am not familiar with that, but as you describe it it sounds unfair. Ravi Batra suggested you could significantly raise your incomes by doing more of your manufacturing while not or only moderately increasing product prices. An advantage is in saving shipping costs and wastes. That's not the same as being against some trade It's just the extreme stuff we are seeing now. Our wage structure has been really messed up by these freebooters. I don't know if anyone else is concerned, but allowing everything to spread rapidly e.g. diseases and pests could be dangerous - unless someone likes cane toads and whatever.

Jul 23 2013:
'Labor costs here in the U.S. have pushed companies to international grounds.'

This is one way to see it, a very popular one indeed, but do you think the principle of profit maximization needs to be pushed at all? Isn't it part of its intrinsic nature to flee in advance whenever there is a better option to flee to?

There is no natural law that a society has to allow a company who left the very country for their benefits to keep their right of that very market. But when we allow it, we shouldn't be surprised, that they do it, and that old grown structures fall apart.

I think we should rethink the current system. Because on international salary levels 'we' as 'employees' could only be competitive again on levels we wouldn't be able to keep our current standard. Not even close. Or is there anyone who could afford to work for $38 a month, 70 hours a week? I have my doubt on this.

So why is apple allowed to produce their iconic, high profit products in China? Do you think, that an average US income would be able to destroy that profit margin? So as long this happens, prepare for more bankrupt cities to come ...

Jul 24 2013:
Isolation? No, balancing! If there is no incentive to move to low labor cost countries, a given infrastructure remains balanced within a 'higher' labor cost country. Before the 'global market idea' was introduced, import duty was a balancing regulative measure to avoid 'job drainage'. Any capitalistic economy goes where the profit is, thats its rule. What is not the rule is to create a stable foundation for the people of a nation, which we can see quite drastic at the moment.

Jul 24 2013:
very good point. to use your example of apple, they depend on american consumers and hence they depend on americans having jobs where they earn a salary decent enough to be able to buy their products, yet they pay as little of those salaries as possible.

when i moved here to japan years ago i thought the idea of mandating employment (basically the labour law is if you make X amount of money you have to employ Y number of people) was ridiculous, but recently i get it. it ensures that as many people as possible have a disposable income, which means that japanese companies make more sales. far from costing them more in employment costs, it ensures they enjoy high profits, while also making sure that one company can't leech off the country and damage other companies by unfairly taking money from the economy without putting anything back in.

Jul 24 2013:
let me disagree - what you are proposing is a protective tariff, similar to the Tariff of Abominations/Tariff act of 1829 and the Tariff Act of 1930 which deepened and caused the great depression to last a lot longer.

The act of putting on a tariff to protect jobs in a country is isolationist

Jul 24 2013:
One of the major concerns of any nation should be the stability of its very economy. But the major concern of most companies is profit maximization which comes without loyalty to the very nation they form in. Large scale tax evasion to the cayman islands may serve as one example on this.

By this, the very moment a nation allows 'free global trade' it loses any effective measures to ensure for a stable and solid inland economy against drainage of all sort, currency, taxes, resources, etc., so it becomes only a matter of time for the collapse to settle in.

When China opened up to the world economically, all German car manufactures got very exited about the new opportunities of this huge untapped market. Yet China did a very clever thing. They granted access to their markets under one important condition only, which was, that German cars for the Chinese marked was to be produced in China to the highest percentage. Imports from Germany were restricted. This clever decision not only created high-grade jobs in China, it also allowed for large scale technology transfer in car production 'for free'. The Chinese pretty wisely enriched their economy this way and controlled the drainage of financial capital towards Germany on substantial levels.

And even though China has become the biggest market for many German car manufactures, this boom did not result in an explosive 'job creation' in Germany. And due tax evasion measures of the same companies, Germany can't even participate on the profits made in China.

'Isolation' as you prefer to name it was smartly used by China, as it demanded to produce within THEIR borders to consolidate their economy and not to weaken it. And even though I do not consider the Chinese 'economic miracle' to be solid in itself, under the ruling principle of capitalism it did manage to gain a dominant role in it and so far.

On the 'great depression' exist several theories about what have caused it, and it depends on which economical view one has.

Jul 24 2013:
That is what Japan did during the 50's and 60's. Most people did not know that to sell something in Japan you had to have a Japanese partner that owned 50 % of the subsidiary in Japan. This lead to a short term gain but its goal was to learn the technology.

The example of car is rather interesting. I believe the most American made car (i.e. has the most American made parts and assembled in America) is a Toyota model.

Jul 24 2013:
What makes you conclude, that Japan's strategy was only a 'short term gain'? Don't you think such 'balancing' could consolidate the economy of a country also longterm?

The risk of any open global market is, that it seems to run fine at the beginning. Companies produce their product in 'low labor cost countries' and sell them with higher profit in 'high labor cost countries', because the purchasing power is higher there BECAUSE of the higher 'labor costs'.

But as more and more companies are using this gradient for their profit maximization, as more and more jobs get lost in the 'high labor cost countries', which consequently reduces the overall purchasing power of that nation. And not only that, because increasing unemployment will further degenerate the wealth of that nation, by either higher taxation to compensate for the losses in taxes or in reducing social services and cultural attainments and finally both of it.

Therefore I think it is in the interest of all people of any nation to protect themselves wisely from 'open markets'. Not to isolate, which would be the other extreme, but to carefully balance the stability on long terms and not on short term profits of just a view.

Very interesting and perfectly working business models have been put in to praxis already, which would balance a home market pretty effectively on its own. The concept is based on the idea, that all workers own their very company. All have an equal share and all have the same vote. Not only tabs this democratic system directly in the motivation of those workers, it also avoids purely profit driven decisions, as it is unlikely that workers would vote for their jobs to be sent to a foreign country due to lower labor cost ... A self correcting mechanism, in which each company has to compete on the market, mainly the home market, yet based on the interest of all working people involved.

This is my favorite concept, as it dermatitises our economy in favor of ALL of those who run it.

Jul 24 2013:
Globally, America has been building the middle class in several countries for decades. At the very same time our middle class here in America has been dwindling. Capitalism, indeed, will migrate to where maximum profit can be obtained, but at what cost?

Perhaps, possibly one day the economic clock with tick our way and we might be a nation with no middle class and cheap labor.

Aug 14 2013:
The auto industry declined DECADES AGO. What we see today is nothing compared to the 1970s. Of course, children don't know that. It was not "off shore labor" that killed Detroit, it was mismanagement and political corruption. Detroit's politicians made long-term promises based on short-term income.

Aug 13 2013:
I believe so. I don't like the idea of the solution being to bail them out. If we bailed out every failing industry we would still have a telegraph industry! I think they need to rethink things and find solutions to problems, and if they can't find solutions then maybe we should let them fail. It may sound cruel but natural selection teaches us survival of the fittest. These problems have been around before. Identify the problems and do historical research and find solutions to the problems that worked!

Aug 13 2013:
I think the crumbling effect is due more to patent laws preventing individuals from competing in established markets with similar ideas. Labor has a tremendous effect but it is not the sole cause of jobs moving away from one location to another.

Given, if jobs move from one country to another and more profit is made, there is no crumbling effect on the global picture. It's just moving from one location to another.

Locally, in the US and Europe, it is a big problem. I feel we will see both an increase in bankruptcy and creative ideas to handle the problem arise.

Part of that solution could be a decline in the money paid to labor. People will do anything to feed their families, even take a cut in salary. If that were to happen, the US would be back in the competition. Of course there would have to be a parallel decline in food prices and housing to feed this labor force. People don't need IPads but they do need housing and food. They could even do with less health care if necessary.

Aug 10 2013:
Detroit's problems were of hubris. They have been in decline for 6 decades and they did nothing to adapt or change to be competitive. Detroit was fat and happy feeling they had it made. They didn't feel they needed to embrace another industry or move up the education or labor ladder to make their city grow.

More political subdivisions will fail if they do not grow organically. That is grow their tax base with rising real estate values instead of raising millage. Tax all business fairly- not taxing them to death until they leave or giving fee in lieu of to get a new business and make up the difference by taxing existing businesses more. These political leaders have to create demand for their areas. There is no reason to decline in population for more than one decade. The first decline is the wake up call, if you do not respond it is the entire community's fault for failure to adapt.

Aug 7 2013:
Oh yes, after Detroit other cities will follow suit and this will be a huge mistake. We have to learn fiscal responsibility in the US and the only way is to start from scratch: default and begin again. Otherwise the US tax payer will be on the hook forever and those who continue to get rich by 'never spending their own money' will just get fatter and fatter--look at the banks and investment firms we bailed out; they haven't changed their behavior one single bit and why should they, it's not their money!!!

Jul 30 2013:
This string has pretty much found all the problems that Detroit has suffered, but in response to the question of outsourcing,.. that is a result more then a cause. Successful businesses look forward and local environment is a consideration, when it turns bad, it will give cause to relocate. If labor and location costs raise.... they leave.
What can we learn....
I heard a speaker on personal finances. He talked about budgeting and living within your budget, about saving for a rainy day, about looking ahead and considering if you got laid off from your job and had to live on very limited income. Identify needs and wants and be ready to limit or deny your wants.
What great ideas..... for cities
Budget prudently,
Save some funds for emergencies
Plan on your tax base going smaller, it always does
Taxing is easy... to easy.

The mistakes that were made in Detroit are so well known.
What I find amusing is the number of city administrators all over the country who have seen Detroit, and following the same path, saying:
"Not a problem, we won't get caught. We are smarter then those people who ran Detroit into the ground"